BARCELONA (Reuters) — Alcatel-Lucent
said it would stay out of a brewing price war in the telecom
equipment market and set itself apart with better service and new
products, including those from a partnership announced on Sunday
with Intel Corp.

Chief Executive Michel Combes said Alcatel-Lucent wanted to gain
market share but not at any cost, as it entered the second year of a
three-year turnaround aimed at restoring regular profits and cutting
1 billion euros of costs.

Analysts predicted that competition could intensify this year among
telecom equipment vendors after Nokia's NSN unit forecast lower
operating margins as it tries to rebuild revenues lost after a bout
of restructuring. A newly aggressive NSN could spark reactions from
Sweden's Ericsson and China's Huawei.

"All the players in the sector have understood that competition
based on price was not the right answer," Combes said on the
sidelines of Mobile World Congress, the wireless industry's largest
annual conference.

"Differentiation is the right way. Each company must find its areas
of excellence and deliver on the services promised to customers," he
said.

NSN Chief Executive Rajeev Suri said on Sunday that the group would
not compete aggressively on price across the board, despite its aim
to return to revenue growth by the second half of the year.

"It's about being selective and targeted on pricing," he said at a
press conference.

At Alcatel's event, Combes unveiled a partnership with chip maker
Intel under which the two will share the costs of research and
development on cloud computing and security.

Known as network function virtualization, the technology allows
telecom operators to rely more on software to run their networks and
less on hardware, which can over time bring down costs. Other
telecom gear makers are also pitching such products.

NSN said it had carried out over 50 commercial trials with carriers
to explore such cloud technology.

The Intel accord is the second R&D partnership announced since
Combes took over as CEO in April 2012, and he pledged more to come.

Mobile chip maker Qualcomm took an undisclosed stake in Alcatel in
July 2013 as part of a research partnership on so-called small
cells, which are small mobile antennas to help operators cover urban
areas.

The Intel partnership does not involve any direct purchase of
Alcatel's shares, but Combes said the two would invest "several
hundred million euros each" with the aim of possibly launching
products for sale this year.

"We can be first to market with products by working with partners,"
said Combes.

Alcatel-Lucent halved its net loss last year as Combes' turnaround
plan kicked in, helped by a capital increase and bond to shore up
the company's balance sheet and 10,000 layoffs.

The shares have more than tripled in value in the past year and
closed at 3.15 euros on Friday, giving the company a market
capitalization of 8.77 billion euros.